Competition hands cement consumers lifeline as firms lower prices to retain market share
A worker at the Athi River Mining factory, makers of Rhino Cement. Manufacturers have expressed fears that weakening of the shilling would affect their profitability. File
Months after the Simba Cement’s plant in Athi River started operation, the four existing players were aware that the business environment would remain the same, but may not have anticipated that they would contend with much thinner margins.
This was especially after Tororo-based investors had set up a 700,000 metric tonne-a year capacity cement plant, also in Athi River, and making their intentions known from the start that theirs would be the cheapest brand.
The Ugandan-owned Mombasa Cement, trading as the Nyumba brand together with Devki Group’s Simba Cement, are still the cheapest brands retailing at up to Sh40 discount per 50-kilogramme bag compared to the dearest trade names.
But it is the sharp increase in the input costs, arising from the weakening local currency that have eroded the manufacturers’ margins but the fierce competition between them has meant that they absorb the higher costs.
At stake are their respective marketshare, even as their total output stays ahead of consumption in the red-hot building sector, meaning any pricing reviews might prove to be disastrous.
Better still, a new grinding plant whose product is expected to trade as Savannah Cement is nearing completion at the Export Processing Zone in Athi River, promising an additional 1.5 million tonnes of cement a year.
When the plant begins operations in early next year, installed cement production capacity would shoot to 5.5 million tonnes annually from about four million currently, even though Mr Benson Ndeta, the managing director at Savannah Cement, says a third of its production would be sold in South Sudan and the Democratic Republic of Congo.
Some executives in the cement market have said the current pricing may not be sustainable but Athi River Mining (ARM), the third largest maker has confirmed that it will not review its prices any time soon.
Mr Raval Narendra, the chairman of Devki group of companies, says that profit margins from the industry have been severely eroded owing to the weakening shilling, but the higher costs are yet to be passed on to the consumers.
“Competition in the cement business is very tight compelling us to maintain the older prices but this is not sustainable for the industry,” said Mr Narendra.
He added that his company was keenly watching the market to see how the other players respond to the heightened input costs before it reviews its pricing.
Lafarge-owned Bamburi Cement and State-controlled East African Portland Cement are both selling their regular brands at Sh730 for a 50-kilogramme bag, but dealers say the prices have previously been as high as Sh750. Athi River Mining’s Rhino cement retails at Sh700, while dealers sell the Simba and Nyumba brands at between Sh685 and Sh700, revealing of the undercutting in the market. Although a vibrant real estate market has seen a steady growth in demand for cement over the past five years, the manufacturers have consistently ensured excess supply with fresh fears that the inefficient players may be pushed out of the market. Rivalry among industry players out to protect their marketshare, has made it untenable for them to raise prices to reflect the higher input costs as each wait for competition to take the first step.
So far, the shilling has lost about a fifth of its value since January indicating that the prices for imported commodities have risen by the same margins, especially for clinker — a the core chemical input in the manufacture of cement.
Cement may be the only commodity that has defied the sky-high inflation rates — which jumped to 18.9 per cent in October, even as costs of other household commodities such as edible oils soared by more than double in the year, with manufacturers citing the soaring input costs.
Pricing reviews
Cement makers, with the exception of Athi River Mining, rely on imported clinker selling at Sh6,800 ($70) per tonne either entirely or in part for the manufacture of cement — translating to about Sh340 for every 50-kilogramme bag of the finished product.
At last year’s dollar rate of Sh78, the clinker cost component was below Sh275 in every bag, indicating that the cement makers may be disproportionately exposed to the effects of the prevailing currency volatility.
The East African Portland Cement (EAPC), ranked the second largest cement maker, is also in a dilemma over the timing of its pricing reviews.
Mr Peter Korir, the head of strategy at EAPC, says that cement has become a highly price sensitive commodity in the local market, and any reviews could mean the loss of marketshare. “Cement is a highly price sensitive commodity and customers would easily switch to a different brand in case of any pricing adjustments,” said Mr Korir.
“Once you lose any customer, it is very difficult to regain one in the prevailing market conditions.”
He also termed the current prices as unsustainable because the profitability margins have been severed yet all businesses were centred on creating value for its shareholders.
“The company is still able to cover its costs but for the industry players to maintain quality and customer service, they prices would only go up,” he added.
Already analysts’ estimates place the marketshare jointly controlled by Bamburi and EAPC, the two oldest players, may have shrank to about 66 per cent, from 85 per cent in 2007 with projections that it would fall to about 50 per cent by 2015.
The company is now working to cutting its reliance on fossil fuels for powering its plant, and has instead invested heavily in coal with plans at an advanced stage to secure limestone and coal reserves in Kitui in the medium term.
The EAPC chairman recently told the Business Daily that the company was seeking clearance from the state to dispose of 1,000 acres of land in Athi River, which had been exhausted of minerals to finance the acquisition of the mineral reserves.
Over the period, it is only Athi River Mining, with its coal-powered plant, that has grown its marketshare to about 14 per cent by the end of last year, also gaining from a pricing strategy. Pradeep Paunrana, the chief executive at ARM, says that his firm would not be reviewing its pricing any time soon because its operating margins are sufficiently cushioned.
“We are not planning any price increases but will rather focus on raising our production efficiency to cut costs further,” said Mr Paunrana in an e-mail response.
ARM expects its 1.5 million-tonne capacity per year cement plant in Tanga would be complete and operational by next April, and a cement grinding plant in Dar es Salaam to be completed in October.
Both plants are expected to increase ARM’s capacity in the region while its production in Kenyan would be sold in the local market.
Mombasa and Simba Cement, the two latest entrants have rode on a pricing strategy to gain sales volumes while their production costs have been cushioned by the efficiency of their grinding plants.
The increased national production capacity has meant that demand consistently lags supply with the surplus production exported to the other East African countries.
Matters are likely to be complicated even further when India’s Sanghi Cemtech backed by a consortium of wealthy investors carries on with the planned cement plant in West Pokot, which is expected to be the single largest plant in the region.
